ThinkPad 8. Source: Lenovo.

There's no such thing as a free lunch. Even as Microsoft (NASDAQ:MSFT) has aggressively cut Windows licensing fees to $0 on smaller devices, that doesn't really help the demand side of the equation. Making the operating system free for OEMs is one thing, but getting people to actually buy the devices is another.

That's the trouble Lenovo has run into with its smaller Windows 8 tablets. The largest PC maker in the world by volume has now stopped selling devices in this category within the U.S., citing a lack of demand. Lenovo says U.S. consumers are still buying larger Windows tablets, and emerging-market demand for 8-inch Windows tablets is stronger, so it is shifting inventory abroad in response. Lenovo will continue selling its Google (NASDAQ:GOOG)(NASDAQ:GOOGL) Android models.

The challenge for Windows 8 on smaller form factors is that Windows 8 is designed to support both touch input and traditional keyboard and mouse input. Smaller devices don't play nicely with keyboard and mouse inputs, particularly when Microsoft still has yet to release a touch-first version of Office for Windows. In fact, Microsoft may even launch a touch-first version of Office on Android before Windows.

The 8-inch tablet market continues to be dominated by Android offerings and Apple's (NASDAQ:AAPL) iPad Mini. While Apple doesn't disclose product mix directly, the sustained drop in iPad average selling prices after the introduction of the first iPad Mini in 2012 suggests a considerable shift toward the smaller model.

Good call, Microsoft
For what it's worth, Microsoft's decision to pull a Surface Mini at the last minute seems rather prescient now. Clearly, domestic demand for 7-inch to 8-inch tablets running Windows 8 is very weak, and launching a smaller version of the device would have inevitably failed. The last thing Microsoft wants is another inventory writedown of unsold Surfaces.

All's not lost
Microsoft may be seeing one of its most important OEMs pull out of one of its most important markets with 8-inch tablets, but the company has plenty of other OEM partners to step up and fill the void. Toshiba has already announced a 7-inch Windows 8 tablet, the Encore 7. Pricing and availability have yet to be determined, but Toshiba unveiled the tablet at Computex last month. The company also currently offers the 8-inch Encore 8.

Eventually releasing a touch-first version of Office for Windows will be critical if Microsoft wants to stand a chance in the small-tablet market. CEO Satya Nadella has made it quite clear that Microsoft needs to refocus on its core strength of productivity, and launching this overdue version of Office may give consumers an actual reason to buy small Windows tablets.